FOREX-Dollar slides, short-covering rally sputters

* Sliding Treasury yields weigh on U.S. currency

* Investors batten down for next week’s Fed meet

(Adds comment, details, updates prices)

By Naomi Tajitsu

LONDON, Oct 28 (BestGrowthStock) – The dollar slipped on Thursday,
relinquishing some of the gains made earlier this week as a
short-covering rally ran out of steam and U.S. Treasury yields
fell.

Traders said dollar selling against the euro and other
currencies by reserve managers was also helping to push the U.S.
currency down.

Investors trimmed extreme short dollar positions earlier
this week as speculation the Federal Reserve might announce
plans to buy more assets to stimulate the economy next week
turned into a guessing game about how much they would purchase.

The New York Federal Reserve has surveyed bond dealers and
investors over the size and impact of a quantitative easing
programme, including scenarios ranging from zero up to $1
trillion, Bloomberg news reported on Thursday, citing a copy of
the survey. [ID:nLDE69R15M]

The dollar rally has lost steam in the absence of
market-moving news, and analysts said the currency would stay
under selling pressure if the Fed says it will continue to pump
money into the market to improve liquidity and help the economy.

“We’d seen a short squeeze in the dollar in the past few
days due to an exhaustion in positioning, but when there’s no
incentive to maintain that, you get some profit taking,” said
Peter Frank, currency strategist at Societe Generale.

“The issue is whether the market believes the Fed will
deliver significant quantitative easing over a definitive time
line. If they do, the dollar will weaken.”

A Reuters poll showed Wall Street analysts expect the
Federal Reserve to buy between $80 billion and $100 billion
worth of assets per month under a new programme widely expected
to be unveiled on Nov. 3. [FED/R]

Other analysts said the dollar was also weighed down by a
narrowing in spreads between 10-year U.S. and euro zone
government bond, which was driven by a fall in U.S. Treasury
yields that put the brakes on a widening seen in the past week.

By 1025 GMT, the euro (EUR=: ) had risen 0.5 percent on the
day to $1.3835, having climbed to a session high around $1.3850
in early European trade. This helped to push the dollar (.DXY: )
0.5 percent lower versus a currency basket.

“We’re seeing some consolidation in the dollar before the
Fed meeting as no one knows how much QE the Fed might do,” said
Marcus Hettinger, global currency strategist at Credit Suisse in
Zurich.

EURO RIDES PERIPHERY CONCERNS

The euro held above a one-week low around $1.3730 hit on
Wednesday, even as ongoing debt concerns in Ireland and Greece,
and a breakdown in budget talks in Portugal highlighted problems
facing periphery euro zone countries.

Frank at SG said that support for the euro despite sovereign
debt issues illustrated the resilience of the single currency,
and that he expected it to rise back above $1.40 in the near
term.

Lingering uncertainty about how the Fed will announce more
QE has increased market volatility, with one-week implied
volatility for euro/dollar (EURSWO=: ) jumping to 15.9 percent on
Thursday from 12.6 percent at the start of the week.

Against the yen, the dollar (JPY=: ) fell half a percent to
the day’s trough of 81.23. The Japanese currency showed little
reaction to a Bank of Japan decision to keep interest rates
virtually at zero while holding off from new policy initiatives.

The dollar is holding above a 15-year low of 80.41 yen hit
earlier this week, but investors remain vigilant for any
yen-weakening intervention after authorities entered the market
last month.

The New Zealand dollar (NZD=D4: ) rose 0.5 percent, brushing
off a Reserve Bank of New Zealand decision to hold rates steady
at 3 percent as investors took comfort from the central bank’s
remarks that rates would still head higher at some point
[ID:nWEL004196] [ID:nSGE69Q0P6].

(Editing by John Stonestreet)

FOREX-Dollar slides, short-covering rally sputters